beyondbrics

What to expect from Taiwan’s new cabinet as they begin work this week? To judge by media speculation on the island over the past few weeks, anything is possible, from bringing in new capital gains tax, to further opening to Chinese investment.

Sean Chen, the new premier, has already given himself the rather broad goal of bringing wealth and happiness to the Taiwanese people. Fortunately he has also provided some clues as to what that means.

Chen said on Monday that Taiwan needed to move beyond export manufacturing to design, research and development – products should not only be made in Taiwan, but also designed by Taiwan. This would, in turn, help Taiwan develop exportable services, which the government could help find new markets for by signing more free trade agreements with other nations.

At the same time, the issue of Taiwan’s wealth gap would need to be addressed by a mixture of changing the tax code, and helping to raise middle to lower class income.

On that note, new finance minister Christina Liu also moved quickly this week to address speculation (and worries among investors) that the government would look to raise new taxes, particularly a capital gains tax.

The concerns about higher taxes during president Ma Ying-jeou’s second term come after the opposition party attacked his administration for Taiwan’s widening wealth gap, and the government deficit, during last month’s presidential elections.

“I am not here to make radical reforms,” Liu told Taiwanese media. While she said nothing has been ruled out yet, Liu promised that any new tax would “not harm market incentives”.

Analysts say that given the prospects of further economic and export slowdown from the continuing euro zone crisis, Taiwan’s new cabinet would almost inevitably have to focus on growth and boosting investment. Taiwan slipped into a mild recession in the fourth quarter last year as weak exports led to a drop in investment.

Raymond Wu, president of the Taipei-based E-Telligence Research Consultancy, an advisory firm for investors, said that the new “very technocrat-dominated cabinet”, will focus first and foremost on ensuring economic growth. As such, any changes to taxes will likely be made with a view to “make sure you won’t develop anti-rich sentiments” in Taiwan, rather than to raise more revenue for government coffers.

Wai Ho Leong, analyst at Barclays Capital, said “the stage is now set for more capital inflows into Taiwan,” particularly from China. Equally important would be bringing more Chinese tourists to Taiwan, “which is a vital policy for revitalising job creation in services industries and ending wage stagnation in the domestic economy, ” he said.

So,  soak the rich, and invite the neighbours for dinner.

Related reading:
Challenges for Taiwan’s growth tzar, beyondbrics
Ma’s victory: plenty of work ahead, beyondbrics
Video: China looms over Taiwan poll, FT Video
FDI in China: inland and at your service, beyondbrics